I. Introduction
Mr. Sebastian B. Arrastia, President of the Rotary Club of Manila (RCM), officers and members of RCM, friends, ladies and gentlemen: Good Afternoon.
It is a pleasure for me to be with you on the occasion of your first Membership Meeting for 2001.
During the past few months, political concerns have dominated the news, diverting public attention from other issues that matter in the long haul. Today, the fourth into the new year, I invite you to shift focus-to take stock of our country?s economic gains and appreciate the progress we have made in advancing the structural reform agenda as well as in laying the foundations for sustainable growth. I hope that after this talk, you will leave this hall convinced that, through our current challenges, we can face the new year ready to make the most of the opportunities that they present.
II. RECENT ECONOMIC DEVELOPMENTS
The year 2000 was indeed a challenging one.
Decade-high world oil prices squeezed supply, leading to higher transport costs and higher wages. A buoyant U.S. economy necessitated the tightening of monetary policy, which narrowed interest rate differentials and contributed to the weakening of regional currencies.
Adverse global developments were compounded by uncertainty on the domestic front arising from, among other factors, the hostilities in the south and troubling questions about public governance.
Nonetheless, the past year was also a fulfilling one. In the face of domestic and international shocks, the Philippine economy managed to pull off a respectable performance. During the first three quarters of 2000, real GNP grew by an average of 4.5 percent, well above the 3.1 percent for the comparable period in 1999. Meanwhile, real GDP improved by 4.2 percent as against the year-ago achievement of only 2.7 percent. The economic expansion was underpinned by the resilience of services and agriculture and the recovery of industry, signaling the economy?s shift to a more balanced and broad-based growth path.
For the whole of 2000, real GNP is expected to grow by 4.2 percent, while GDP growth is estimated at 4.0 percent. Growth is expected to ride on the continuing strength of agriculture, services and industry. On the demand side, stronger personal consumption and exports are expected to be the drivers for the economic expansion.
Notwithstanding the pick-up in economic activity last year, prices have remained generally stable. The average inflation rate for the first 11 months of 2000 of 4.0 percent was well below the full-year target of 5.0-6.0 percent. Moreover, it was achieved despite inflationary pressures from oil price and transport fare increases and the depreciation of the peso, which fed into wage adjustments.
Despite posting an uptrend starting October 2000, interest rates settled lower during the year, with the 91-day t-bill rate averaging 9.861 percent, compared to 10.197 percent in 1999. If you will recall, last year, we raised our policy rates three times-in May, September and October. Let me note in this regard, however, that the calibrated adjustments in interest rates appear to not have stood in the way of economic growth, particularly since we have started to gradually bring our policy rates down, owing to broad stability in the financial markets. As a result, lending rates started to ease toward the end of the year. Domestic credits have started to go beyond single digit, with the bulk of bank loans going into manufacturing and other key economic sectors.
In the external sector, the current account continued to be in surplus at over US$6 billion for the first nine months of 2000, owing to brisk exports. However, a weaker financial account offset the gains in the current account, resulting in an overall balance-of-payments deficit of US$532 million during the period.
The robust current account position helped to build up Gross International Reserves (GIR) to $14.5 billion as of end-November 2000. This GIR level is enough to cover 4.4 months? worth of imports of goods and payments of services, and is more than enough to cover short-term obligations, twice-over.
The country?s external debt dropped to US$51.85 billion at end-September 2000 from US$52.16 billion at end-June 2000. Owing to this and good export numbers, the country?s debt service burden has remained manageable. For the period January-September 2000, the debt service ratio reached only 13.38 percent compared to 17.0 percent, which was observed in the early 1990s.
Meanwhile, the peso-dollar rate has, of late, been subject to substantial gyrations owing to the spate of bombings in the metropolis. We note with regret that these adverse developments have reversed-temporarily, we hope the gains we have made in stabilizing the peso. It may be worth noting that, prior to these unfortunate events, the peso was making some headway, appreciating slightly toward the end of December, on account of foreign exchange inflows and the progress in the constitutional process. The strengthening of the peso at the close of 2000 may also be attributed in no small part to the measures taken by the BSP toward this end.
The financial system remains stable and sound. Total assets continued to climb; the capital-to-risk assets ratio remained high at 16.5 percent; while asset quality was kept manageable, with the non-performing loan ratio declining slightly from 15.73 percent in September 2000 to 15.56 percent in October.
In the fiscal sector, the task of consolidation remains a tall order. For the period January-November 2000, the national government incurred a deficit of P114.4 billion, exceeding the target for the period by P53.03 billion. Nonetheless, it is helpful to note that the increasing use of domestic sources to finance the shortfall did not lead to a precipitate increase in market lending rates. The authorities are fully aware of the need for prudence in fiscal management and are taking steps to ensure that the national coffers will provide ample support for this year?s budgetary needs.
Overall, if the economy?s performance last year is any indication, we are moving toward more broad-based-and thus sturdier and more sustainable-growth, even as we strive to rise to the challenge of fiscal consolidation.
III. Policy directions, structural reforms and outlook for 2001
Policy directions
This year, the conduct of monetary policy will continue to focus on containing inflationary pressures while maintaining stability in the foreign exchange market. This objective, we believe, will be best served by our shift from monetary targeting to inflation targeting as the framework for conducting monetary policy, by the middle of this year.
Under the inflation targeting framework, the government will announce the inflation target that is committed to achieve over a given target horizon. In cases when the inflation targets are not achieved, the BSP will have to explain the reasons for the slip and the policy measures that it will need to adopt to bring inflation to target. An indispensible ingredient, therefore, is the BSP's accountability to the price stability objective. Credibility is thus built on a record of adherence to the inflation target. Such a framework enhances the transparency of monetary policy and, therefore, promotes the efficient functioning of markets.
Structural Reforms.
Alongside efforts to provide a monetary policy environment conducive to the stability of the general price level, the BSP will continue to pursue reforms to strengthen the financial system. While policies implemented over the past decade have had major positive results - made evident by the resiliency of the domestic financial system in the midst of the 1997 crisis - events over the past three years have highlighted that more needs to be done.
To prepare the financial system for the challenges posed by globalization, the BSP is implementing major reforms in financial regulation and legislation. In particular, the BSP has sought to prepare the domestic banking system for the increased international competition brought on by globalization through the adoption of measures in the following areas:
improving the legislative and regulatory framework
On the legislative front, the BSP has formed a committee to formulate the implementing rules of the new general banking law of 2000 or R.A. No. 8791.
The initial output of the committee involves the formulation of the guidelines for implementing provisions on foreign stockholdings, and the deferment by the monetary board of the implementation of the provisions allowing banks to sell the financial products of their allied undertakings or of their investment house units. These guidelines were issued under Circular No. 256 dated 15 August 2000.
The reforms introduced in the GBL 2000 will be complemented by the proposed amendments to the charter of the BSP. These measures aim to enhance the supervisory and enforcement powers of the BSP, further improve prudential standards for the banking system, intensify competition in the banking sector, and enhance the BSP?s independence.
Strengthening prudential measures
To improve regulatory oversight and monitor bank compliance with the new guidelines, the BSP is developing a more integrated system for bank reporting and a more effective supervisory framework. The significant developments in this area include:
Reform of the settlements and payments system. Settlement risk will be reduced by developing a real-time gross settlements system (RTGS), which will cover equities, fixed income, money, and foreign exchange markets and will effect final settlement on a continuous basis; development by the BSP of a risk assessment system in lieu of a checklist-driven approach to on-site bank examination; and
implementation of a risk management program, which involves the adoption of the BAP?S foreign exchange manual and financial markets risk reference manual, and the holding of risk management courses for bank examiners.
Encouraging bank mergers and consolidations
The BSP also continues to encourage bank mergers and consolidations as a means of enhancing the strength of the financial system. As of end-November 2000, a total of 21 banks, 15 of which were commercial banks, have entered into such arrangements with both banks and non-bank financial institutions. Two more applications involving five banks are now pending. Let me note at this point that, these consolidations notwithstanding, a BSP study finds that there is a healthy level of competition in the banking system, which is necessary for safeguarding the interests of depositors and borrowers as well as banks? other stakeholders.
Outlook
These policy thrusts and structural reform measures should help us consolidate and build upon our recent gains. For 2001, the government expects the economy to grow by 3.2-3.7 percent in terms of GNP and by 3.0-3.5 percent in terms of GDP. Growth is expected to be underpinned by the continued strength of the services sector. Meanwhile, agriculture and industry are also expected to post positive growth.
In the external sector, macroeconomic developments in the major industrial countries are expected to continue to exert a major influence on domestic economic developments. Key factors that are being monitored include: the prospects for lower interest rates and soft landing in the U.S., the strength of recovery of the Japanese economy, the momentum of growth in Europe, the volatility in global financial markets, and the divergence of major currency exchange rates from medium-term fundamentals.
On the domestic front, downside risks to the country's growth momentum include the state of fiscal finances and the quality of public governance, particularly in the area of transparency and accountability.
Meanwhile, inflation is expected to be in the range of 6.0-7.0 percent.
V. Conclusion
I have given you some broad-brush strokes on the state of the Philippine economy. Recovery is clearly under way. However, conditions can turn tougher this year. We all know that the ongoing political exercise is an important factor. We should allow it to take its course. At the same time, it is important to recognize that part and parcel of the process of recovery is a strategy of economic reform that will give credibility to the country?s economic program, as well as greater clarity and coherence in overall economic management capabilities.
For its part, the BSP remains committed to the pursuit of structural reforms in the financial system. We will also continue to provide a macroeconomic policy environment that is both conducive to growth and to the maintenance of price and exchange rate stability. Through these measures, we hope to improve the quality of the country?s economic recovery, thereby reducing its vulnerability to external shocks. In the end, these efforts should put the Philippines on the path of sustainable growth.
Thank you and I wish you all a prosperous new year.
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